PRICEWATERHOUSECOOPERS INC.
CORPORATE LAWS AMENDMENT BILL – 2006
SUBMISSION FOR THE PUBLIC HEARINGS OF THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY ON THE
CORPORATE LAWS AMENDMENT BILL
29 May 2006
INDEX
EXECUTIVE SUMMARY OF ISSUES AND
RECOMMENDATIONS
1. Accounting Standards applicable to Companies
2. Drafting issues relating to the provision of non-audit services by
the auditor
1. Accounting Standards applicable to Companies
2. Drafting issues relating to the
provision of non-audit services by the auditor
3. Drafting suggestions for other
sections of the Bill
Submission on S275A of the Corporate Laws Amendment Bill
1.1 Financial Reporting
Standards for Public Interest Companies
To enable South African
public interest companies to be internationally competitive, the Bill should
prescribe compliance with International Financial Reporting Standards for
public interest companies.
1.2 Accounting Standards for
Limited Interest Companies
The current provisions of the
Bill will not result in a reduced burden on limited interest companies
regarding compliance with onerous accounting standards. The Bill should
prescribe compliance with standards for limited interest companies developed by
the Financial Reporting Standards Council.
As these standards do not
currently exist, the Department of Trade and Industry should impose a time
limit for the development of these accounting standards.
1.3 Compliance with
accounting standards and fair presentation in financial statements
The Bill should not distinguish
between compliance with accounting standards and the requirement for financial
reports not to be false or misleading as this could cause tension where there
was a perceived conflict between the two concepts. Section 287A should be
redrafted to state that nothing in this section permits non-compliance with
accounting standards.
We recommend that the
proposed new section 275A should be deleted in its entirety from the Bill to
allow the Independent Regulatory Body for Auditors ("IRBA”) to fulfil its
statutory obligations in terms of the Auditing Profession Act 2005 to regulate
the auditing profession.
If our recommendation
to delete the proposed section 275A(1) from the Bill in its entirety is not
accepted, then we recommend that the words “An auditor” in section 275A(1) should be replaced with the
words “The “designated auditor” or the individual Registered Auditor
referred to in section 37 of the Auditing Profession Act, 2005 (Act No. 26 of
2005) who is ....” and that the words "tax advisory services"
are deleted from section 275A(1).
1.1 Financial Reporting
Standards for Public Interest Companies
Background
The “Guidelines for Corporate
Law Reform”, issued May 2004, quoted the introduction of the Integrated
Manufacturing Strategy (IMS) of the Department of Trade and Industry (dti),
said to capture the Government’s vision for the South African economy:
‘Our country needs an economy
that can sustainably meet the needs of all our economic citizens – our people
and their enterprises. This means access to quality work and enterprise
opportunities, and access to the capacities and skills to make use of these
opportunities. Enterprises of all types and sizes will have to become adaptive,
innovative and internationally competitive’.
Current wording of the Bill
“ ‘financial
reporting standards’ means statements of Generally Accepted Accounting Practice adopted by
the Accounting Practices Board prior to the establishment of the Council, and
thereafter issued in terms of section 440U(2);”
“285A.
(1) A public interest company—
(a) must comply with financial
reporting standards;
(b) must comply with the
provisions of this Act and Schedule 4 that are applicable to public interest
companies;
(c) must prepare financial
statements that fairly present the financial position and the results of the
operations of the company (and its subsidiaries, if applicable) in accordance
with paragraph (a).”
“Functions
of Council
440S.
(1) The Council shall—
(a) establish financial
reporting standards for public interest companies; and
(b) develop standards for
limited interest companies.
(2) Financial reporting standards mentioned in subsection (1)(a) shall be in accordance with the
International Financial Reporting Standards of the International Accounting
Standards Board or its successor body.
(3) Standards mentioned in subsection (1)(b) shall be developed in consultation with representatives of
limited interest companies.”
Issues
International Financial Reporting Standards (IFRS), issued
by the International Accounting Standards Board (IASB) are recognised
internationally.
The objectives of the IASB are to:
(a) to develop, in the public interest, a single set of high
quality, understandable and enforceable global accounting standards that
require high quality, transparent and comparable information in financial
statements and other financial reporting to help participants in the world's
capital markets and other users make economic decisions;
(b) to
promote the use and rigorous application of those standards; and
(c) in fulfilling the objectives associated with (a) and
(b), to take account of, as appropriate, the special needs of small and
medium-sized entities and emerging economies; and
(d) to
bring about convergence of national accounting standards and International
Accounting Standards and International Financial Reporting Standards to high
quality solutions.
In South Africa, the JSE Limited requires listed companies
to comply with IFRS.
The Bill requires Public Interest Companies (PICs) to comply
with Financial Reporting Standards (FRS). These standards will be established locally by the Financial Reporting
Standards Council (the “Council”). Although the accounting standards for PICs
must be “in accordance with” IFRS, PICs will still have to comply with FRS –
local accounting standards. The Bill does not allow companies to comply with
IFRS as these are not established by the Council. IFRS will therefore not be Financial Reporting Standards as
defined.
Furthermore, the Bill requires FRS to be Gazetted by the
Minister. There could be a substantial time delay between the IASB issuing an
IFRS standard, and the Council establishing a similar standard in South Africa.
IFRS and FRS will be closely related, but will not necessarily be the same.
If South African companies want to be internationally
competitive, they will have to use accounting standards that are recognised
world-wide. While there will be a tight correlation between FRS and IFRS, PICs
financial statements will refer to compliance with South African FRS, not
International Financial Reporting Standards. Reference to FRS may not be
understood in the international economy.
Suggestion
The Bill should require PICs to comply with IFRS.
The Council should however develop accounting standards for
South African specific topics that may not be covered by IFRS. This would be
similar to the current accounting standard-setter, the Accounting Practices
Board that, for example, developed a local accounting standard on the treatment
of BEE transactions.
1.2 Financial reporting framework for
limited interest companies
Background
The “Memorandum on the objects of the
Corporate Laws Amendment Bill, 2006” states that since the standards imposed on
PICs are primarily for the benefit of
investors and since their requirements are onerous, it is necessary to
make provision for closely held companies that do not offer their shares to the
public.
Current
wording of the Bill
“S285A(2) A limited interest company—
(a) must comply with the
accounting framework of financial reporting standards;
(b) must comply with the
provisions of this Act and Schedule 4 that are applicable to limited interest
companies;
(c) must prepare financial
statements that fairly present the financial position and the results of
operations of the company (and its subsidiaries, if applicable) in accordance
with paragraphs (a) and (b).”
“Functions
of Council
440S.
(1) The
Council shall—
(a) establish financial
reporting standards for public interest companies; and
(b) develop standards for
limited interest companies.”
Issues
There appears to be a discrepancy between
S440(S)(1)(b) and S285A(2)(a): The Council is required to develop standards for
Limited Interest Companies (LICs) but LICs are not required to comply with
these standards.
The Bill requires LICs to comply with the accounting framework of FRS. Our understanding is that
this refers to the conceptual framework used by the IASB to develop IFRS. This
framework sets out the concepts that underlie the preparation and presentation
of financial statements, but does not contain guidance on the accounting
treatment for any specific items. The requirement of the Bill implies that the
onus of determination of accounting policies for all items of assets,
liabilities, income and expenses of LICs will rest on the directors of these
companies. Each LIC will thus have to be its own accounting “Standard-Setter” –
a task that keeps staff employed by the IASB busy on a full-time basis. The
envisaged relief for LICs has thus not been achieved by this provision in the
Bill. In fact, the provisions of the Bill for LICs could prove to be more
burdensome than the requirements for PICs.
Suggestion
The Bill should require LICs to comply with the Standards for limited
interest companies developed by the Council.
Because these standards do not currently exist, the Department of Trade
and Industry should put a time limit on the Council for developing these
Standards.
1.3 Compliance with accounting standards and fair presentation
Background
The Bill gives legal backing to accounting standards, and states that
non-compliance with accounting standards is an offence.
Issue
Bill refers to (i) compliance with the standards, (ii) fair presentation
of the financial statements and (iii) offences relating to financial reports
that are “false” or “misleading”. Refer for example to S285A and S287 &
S287A:
“287. If any financial statements of a company which are incomplete in
any material particular or otherwise do not comply with the requirements of
this Act, are issued, circulated or published, the company and every director
or officer thereof who is a party to such issue, circulation or publication,
shall be guilty of an offence.”
“False
or misleading reports
287A. (1) If any financial report of a company is
false or misleading in a material respect, any person who is a party to the
preparation, approval, publication, issue or supply of that report and who
knows or ought reasonably to suspect that it is false or misleading is guilty
of an offence unless subsection (3) applies.”
The reference to (i) compliance with the accounting standards; (ii) fair
presentation in the financial statements and (iii) the prohibition on being
“false” or “misleading” could perpetuate the perception that there could be a
difference between compliance with the accounting standards and fair
presentation in the financial statements (which is measured against a written
benchmark), and presentation that is false or misleading (which is measured
based on personal beliefs).
Reference to “fair presentation” in the Bill is furthermore unnecessary
since the accounting literature already deals with this concept:
IAS 1, Presentation of Financial Statements states:
“Fair
presentation and compliance with IFRSs
.13 Financial statements shall present fairly the financial position,
financial performance and cash flows of an entity. Fair presentation requires
the faithful representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional
disclosure when necessary, is presumed to result in financial statements that
achieve a fair presentation.”
and
“.15 In virtually all circumstances, a fair
presentation is achieved by compliance with applicable IFRSs.”
Suggestion
S287A should be redrafted to state that nothing in this section permits
non-compliance with accounting standards.
Suggested wording for S285, incorporating all of the above
comments:
‘‘General requirements for financial statements
285A. (1) A public interest company—
(a) must comply with International Financial Reporting Standards;
(b) must comply with the provisions of this Act and Schedule 4 that are
applicable to public interest companies;
(c) must prepare financial statements that fairly present the financial
position and the results of the operations of the company (and its
subsidiaries, if applicable) in accordance with paragraph (a).
(2) A limited interest company—
(a) must comply with the accounting framework standards developed
for limited interest companies of financial reporting standards;
(b) must comply with the provisions of this Act and Schedule 4 that are
applicable to limited interest companies;
(c) must prepare financial statements that fairly present the financial
position and the results of operations of the company (and its subsidiaries, if
applicable) in accordance with paragraphs (a) and (b).
(3) Financial statements
must clearly state that they have been prepared in accordance with—
(a) this Act prior to its amendment by the Corporate Laws Amendment Act,
2006;
(b) financial reporting standards; or
(c) the requirements of subsection (2)(c).
A detailed explanation is provided in Appendix I
Background
The Bill contains a number of
amendments to enhance auditor independence.
One of these amendments is
the stipulation that the auditor appointed to a Public Interest Company may not
perform bookkeeping or accounting services, or internal audit or tax advisory
services for that company, to the extent that these services would be subject
to auditing.
Current
wording of the Bill
“Certain non-audit services not open to current
designated auditor of public interest company
275A.
(1) An auditor appointed to a public interest company may not for the duration
of the appointment perform any bookkeeping or accounting (as distinct from
auditing) services and, to the extent
that these would be subject to its own auditing, internal audit or tax advisory
services for that company.
(2)
Subsection (1) does not affect the power of an audit committee under section
270A(1)(d) or (e) to further limit the services which an auditor of that
company may render."
Issues
Tax advisory services
"Tax advisory
services", to the extent that
these services would be subject to auditing, has been added to the Bill since
the previous draft at the suggestion of the South African Revenue Services. We
consider that this is inappropriate as it is generally accepted in both
developed countries (e.g. UK & US) and developing countries (Brazil, India,
China & Mexico) that most tax services do not affect auditor independence.
In addition, we consider that auditor provided tax services enhance audit
quality and a prohibition on auditor provided “tax advisory services” would increase Public Interest Companies’
audit costs.
Inconsistent
references in the heading and the actual text
The heading of
section 275A in the current Bill refers to “designated auditor”, whilst
the section itself refers to the section applying to the “auditor”.
Suggestions
We recommend that the
proposed new section 275A should be deleted in its entirety from the Bill to
allow the Independent Regulatory Body for Auditors ("IRBA”) to fulfil its
statutory obligations in terms of the Auditing Profession Act 2005 to regulate
the auditing profession. This would
allow a full and transparent debate to take place on auditor independence that
involves the participation of all stakeholders such as Government, SARS, the
investing public, Public Interest Companies, IRBA, individual Registered
Auditors and firms, the SAICA and the JSE Limited. This debate should take into account the
international environment in which many Public Interest Companies operate.
If our recommendation
to delete the proposed section 275A(1) from the Bill in its entirety is not
accepted, then we recommend that the words “An auditor” in section 275A(1) should be replaced with the
words “The “designated auditor” or the individual Registered Auditor
referred to in section 37 of the Auditing Profession Act, 2005 (Act No. 26 of
2005) who is ....” and that the words "tax advisory services"
are deleted from section 275A(1). This will result in section 275A(1) having
the same scope as in the previous draft of the Bill.
3.1
Definitions
Current
wording of the Bill
“‘financial statements’ means annual financial
statements, provisional annual financial statements and interim or preliminary
reports and includes, where applicable, group and consolidated financial
statements;”
Suggested
Wording
“‘financial statements’ means annual financial
statements, provisional annual financial statements and interim or preliminary
reports and includes, where applicable, group and consolidated financial
statements;”
Basis for
suggested wording
“Preliminary reports” are not dealt with in the rest of the
Bill. These types of reports are mentioned in the JSE Limited Listings Requirements.
3.2
Section 280
Current
wording of the Bill
“Section 280 of the
Companies Act, 1973, is hereby amended by the substitution
for subsections (2), (3)
and (5) of the following subsections respectively:
‘‘(2) An auditor intending to
resign shall deliver to the company and to the Registrar a written notification
in the prescribed form to the effect that he or she has no reason to believe
that in the conduct of the affairs of the company a [material irregularity] reportable
irregularity, within the meaning of section 22 of the Auditing Profession Act,
2005 (Act No. 26 of 2005), has taken place or is taking place which has caused
or is likely to cause financial loss to the company or to any of its members or
creditors, other than an irregularity (if any) which has been reported to the [Public
Accountants’ and Auditors’ Board in terms of the Public Accountants’ and
Auditors’ Act, 1991 (Act No. 80 of 1991)] Regulatory Board under that Act,
and it shall not be necessary that such an auditor shall have carried out, for
the purposes of such notification, a special audit subsequent to the date up to
which the last annual financial statements on which he or she has already
reported, were made up.”
Suggested
wording
“‘(2) An auditor intending to
resign shall deliver to the company and to the Registrar a written notification
in the prescribed form to the effect that he or she has no reason to believe
that in the conduct of the affairs of the company a [material
irregularity] reportable irregularity, within the meaning of section 22
of as defined in the
Auditing Profession Act, 2005 (Act No. 26 of 2005), has taken place or is
taking place which has caused or is likely to cause financial loss to the
company or to any of its members or creditors, other than an irregularity
(if any) which has been reported to the [Public Accountants’ and Auditors’
Board in terms of the Public Accountants’ and Auditors’ Act, 1991 (Act No. 80
of 1991)] Regulatory Board under that Act, and it shall not be necessary
that such an auditor shall have carried out, for the purposes of such
notification, a special audit subsequent to the date up to which the last
annual financial statements on which he or she has already reported, were made
up.”
Basis for
suggested wording
The references to “reportable irregularities” are
inconsistent with the Auditing Profession Act.
3.3
Sections 303 & 304
Current wording of the Bill
“43. Section 303 of the Companies Act, 1973, is
hereby amended by the substitution
for the words preceding
paragraph (a) of the following
words:
‘‘Every public interest
company [having a share capital], other than a wholly owned subsidiary,
shall not later than three months after the expiration of the first period of
six months of its financial year send to every member and holder of debentures
of the company an interim report [fairly presenting] on the business and
operations of the company or, in the case of a holding company, of the company
and its subsidiaries, during the said period of six months, and the results
thereof: Provided that—’’.
“Amendment
of section 304 of Act 61 of 1973
44.
Section
304 of the Companies Act, 1973, is hereby amended by the substitution for
subsections (1) and (2) of the following subsections respectively:
‘‘(1) Every public
interest company [having a share capital], other than a wholly owned
subsidiary, which does not within three months after the end of its financial
year issue copies of its annual financial statements in terms of section 302
(1) shall not later than the date on which the said period of three months
expires send to every member and holder of debentures of the company a copy of
the provisional annual financial statements of the company [fairly
presenting the business and operations of the company] or, in the case of a
holding company, of the company and its subsidiaries during that accounting
period, and the results thereof.”
Impact of
current wording
Subsidiaries of public interest companies are also “public
interest companies”. It is impracticable for all subsidiaries of public
interest companies to prepare interim and provisional reports.
Suggested
wording
“43. Section 303 of the
Companies Act, 1973, is hereby amended by the substitution
for the words preceding
paragraph (a) of the following
words:
(1)‘‘Every public interest
company [having a share capital], other than a wholly owned
subsidiaryies of public interest companies, shall not
later than three months after the expiration of the first period of six months
of its financial year send to every member and holder of debentures of the
company an interim report [fairly presenting] on the business and
operations of the company or, in the case of a holding company, of the company
and its subsidiaries, during the said period of six months, and the results
thereof: Provided that—’’.
“Amendment
of section 304 of Act 61 of 1973
44. Section 304 of the
Companies Act, 1973, is hereby amended by the substitution for subsections (1)
and (2) of the following subsections respectively:
‘‘(1) Every public
interest company [having a share capital], other than a wholly owned
subsidiaryies of public interest companies, which does not
within three months after the end of its financial year issue copies of its
annual financial statements in terms of section 302 (1) shall not later than the
date on which the said period of three months expires send to every member and
holder of debentures of the company a copy of the provisional annual financial
statements of the company [fairly presenting the business and operations of
the company] or, in the case of a holding company, of the company and its
subsidiaries during that accounting period, and the results thereof.”
3.4
Attendance of auditors of annual general meetings
Suggestion
For both practical and logistical purposes, we suggest that
the Bill be amended to require that questions to be directed to the auditor at
an annual general meeting be provided to the auditor prior to the meeting.
BACKGROUND
Proposed
section 275A
1.
Paragraph 29 of the Corporate
Laws Amendment Bill B6 – 2006, (“the Bill”) introduced in parliament on 12 May
2006 contains the following proposed new section 275A to the Companies Act, No.
61 of 1973 (“Companies Act”):
“Certain non-audit services not open to
current designated auditor of public interest company
275A.
(1) An auditor appointed to a
public interest company may not for the duration of the appointment perform any
bookkeeping or accounting (as distinct from auditing) services and, to the extent that these would be subject to
its own auditing, internal audit or tax advisory services
for that company.
(2) Subsection
(1) does not affect the power of an audit committee under section 270A(1)(d) or
(e) to further limit the services which an auditor of that company may
render."
(NB. Our emphasis added)
2. The
proposed section 275A is hereinafter referred to as section 275A.
3. The
previous draft of the Bill, which had been circulated to interested parties for
comment (including the South African Institute of Chartered Accountants [SAICA]
and the Public Accountants and Auditors Board [“PAAB”]) did not include any
reference to “tax advisory services”.
In addition, the previous draft Bill referred to the prohibition only applying
to “an individual” who is “the nominated auditor” , whereas the
revised section 275A(1) in the current Bill refers to the section applying to
the “auditor”.
No
definitions
4. The
terms “bookkeeping”, “accounting”,
“internal audit” and “tax advisory
services” and “to the extent that
these would be subject to its own auditing” that appear in section 275A(1)
are not defined in the Bill. “Public
Interest Company” is defined quite widely and includes
listed companies and other public companies and their subsidiaries that are incorporated
in South Africa.
No
materiality requirement
5. Section
275A(1) is not qualified by any requirement for the tax implications of the
subject matter of the advice, or the internal auditing service, to be material
to the annual financial statements of the Public
Interest Company for the section to apply.
No
transitional arrangements
6. The
Bill contains no transitional arrangements for the introduction of section
275A.
EFFECT OF
S275A(1) ON AUDITOR PROVIDED TAX ADVISORY SERVICES
Tax
advisory services subject to own auditing
7. Based
upon the wording of the current Bill, the effect of the addition to section
275A(1) of tax advisory services
would be that the incumbent auditor or auditors of a Public Interest Company would no longer be able to provide any tax advisory services to a Public Interest Company to the extent that these would be subject to
its own auditing.
8. The
above is contrary to international trends in both developed countries (e.g. UK
& US) and developing countries (Brazil, India, China & Mexico) where it
is accepted that most tax services do not adversely affect auditor
independence. In addition, we consider that auditor provided tax services
enhance audit quality and a prohibition on auditor provided “tax advisory
services” would increase Public interest Companies’ audit costs.
EFFECT OF s275A(1) ON AUDITOR PROVIDED BOOKKEEPING OR ACCOUNTING SERVICES, AND TO THE EXTENT THAT THESE WOULD BE SUBJECT TO
ITS OWN AUDITING, INTERNAL AUDIT OR TAX ADVISORY SERVICES
Wider scope than intended
9. As discussed below, due to the current
Bill now referring to the section
applying to the “auditor”, whereas in
the previous draft Bill the prohibition only applied to “an individual” who is “the
nominated auditor”, the scope of
section 275A(1) in the current Bill is much wider than our understanding of the
intention of the section. This is discussed in detail below.
Legal interpretation of section 275A
10. The
heading of section 275A in the current Bill refers to “designated auditor”,
whilst the section itself refers to the section applying to the “auditor”.
11. We consider that
this inconsistency is inappropriate and is very confusing as,
in terms of paragraphs 25 and 26 of the Bill, the proposed section 273(5) of
Companies Act, read with the proposed section 274(3), defines the "designated
auditor" as “the individual registered auditor (being a member of
the firm) who undertakes the audit". Section 274(1) makes it clear that “this section (i.e. s274) only applies where the
auditor appointed in terms of section 270(1) is a firm”.
12. The “auditor”
is the “firm” referred to in section
274 of the Companies Act, where the auditor is not an individual person. Where
the auditor is not a “firm”, the
auditor is the individual Registered
Auditor. The term “auditor” is not defined, but it is reasonably
clear that this means the Registered Auditor (whether an individual person or a firm) appointed in terms of section 270(1) of the Companies Act.
13. In terms of the paragraph 21 of the
Bill, section 269 of the Companies Act is amended by the addition of the
following subsections:
"(6)
No person or firm may be appointed as auditor
of a company unless that person or firm is a registered auditor.
(7)
In this Chapter "registered auditor", "firm" and
"Regulatory Board" have the same meanings as in the Auditing
Profession Act, 2005 (Act No. 26 of 2005)." (“APA”).
(NB. Our emphasis
added)
14. "Firm" is defined in
APA as ““firm” means a partnership, company or sole proprietor
referred to in section 40;”
15. The
reference to section 40 is a typing error. It appears that the correct
reference should be to Section 38 which reads as follows:
"38. Registration of firms as registered
auditors
(1)
The only firms that may become
registered auditors are -
(a) partnerships
of which all the partners are individuals who are themselves registered
auditors;
(b) sole proprietors where the proprietor is
a registered auditor; and
(c) companies which comply with subsection
(3)."
16. Notwithstanding that the heading to section
275A refers to designated auditor, we consider that the prohibition on
certain auditor provided non-audit services, as currently worded in the Bill,
would apply to:
(a) all “individuals” who are Registered
Auditors (as envisaged in section 37 of the APA) who are appointed as the
auditor of a Public Interest Company and to all of such auditors staff; and
(b) all directors, partners and staff of a firm
where that firm is appointed as
the auditor.
17. As the following extract from section 37
of APA demonstrates, it is clearly envisaged that an individual may register as an auditor in his capacity as an individual, or may register as a sole
proprietor firm as envisaged in
section 38:
“37. Registration of individuals as registered
auditors
(1) An individual must apply on the
prescribed application form to the Regulatory Board for registration.
(2) If,
after considering an application, the Regulatory Board is satisfied that the
applicant -
(a) ……..
(e) has
met any additional requirements for registration as prescribed under section 6,
the Regulatory Board must, subject to subsections (3) and (5), register the
applicant, enter the applicant’s name
in the register and issue to the applicant a certificate of
registration on payment of the prescribed fee.
(3) The
Regulatory Board may not register an individual if that individual -
(a) ………………………………
18. In law, the wording of the actual section
275A(1) in the current Bill, which uses the word “auditor”, would take precedence over the
headings in the Bill. As detailed in paragraph 17, we understand however that
the intention was for the section to only apply to the “designated auditor”
as the original draft Bill on which the Department of Trade & Industry
solicited comments referred in section 275A(1) to the prohibition applying to
the “nominated auditor”. In
terms of section 273(5) of the original Bill, read with section 274(2), the “nominated
auditor” was “the individual registered auditor (being a member of the
firm) who undertakes the audit.”
Intention of section 275A
19. Based
on informal enquiries we have made of the South African Institute of Chartered
Accountants (“SAICA”), we understand that their understanding of the intention
of section 275A(1) is that it should only apply to the “designated auditor”
as defined in the Bill. We understand that this was also the intention of the
the Department of Trade and Industry. This
understanding is consistent with the changing of the word “auditor” in the heading in the original bill to “designated auditor” in the current
Bill.
20. We
understand from the Summary of
Submissions on the original draft Bill that was provided to us, and the other
firms and individuals who commented on the original draft Bill, by the
Department of Trade & Industry, that tax
advisory services to the extent
that these would be subject to its own auditing, were added to section 275A(1) at the suggestion of the South African Revenue Service (“SARS”). The
views of the South African Revenue Service (“SARS”) on this matter are thus
relevant to the current debate.
21. We understand from informal discussions with the
Commissioner of SARS’s office (M Kingon and F Tomasek) that SARS’s intention in
relation to the addition of tax advisory
services to section 275A(1) was that the proposed prohibition should only
apply to tax advisory services
provided by the designated auditor and
not to such services provided by the firm
where the firm was appointed as the auditors. We further understand that SARS
intend advising the Portfolio Committee that their intention was that section
275A(1) should only apply to the designated
auditor.
Individuals,
“firms”, and “designated auditors”
22. If our
understanding of the intention is correct (i.e. that
the section should only apply to the designated auditor), the
section as currently drafted would adversely affect firms of
auditors, (whether with more than one partner or a firm that is a sole proprietor),
as in this case the designated auditor (i.e. Registered Auditor
responsible for the audit) would be prohibited from providing the services
referred to in section 275A(1), including tax advisory services. These adverse consequences would arise as an
individual who was appointed as auditor in his or her individual capacity as a Registered
Auditor (in terms of section 37 of APA), as opposed to a firm, would
not be prohibited from providing the services referred to in section 275A(1),
including tax advisory services, as (for the reasons set out in paragraph 9) he
or she would not be the designated auditor as defined.
23. The adverse effects on firms of auditors compared to an individual Registered Auditor can
be eliminated by changing the words “An auditor” in section
275A(1) of the current Bill to the words “The designated auditor or the
individual Registered Auditor referred to in section 37 of the Auditing
Profession Act, 2005 (Act No. 26 of 2005 who is .......”. If this suggested change is made, partners
of a firm that had been appointed as the auditor of a Public Interest Company (other than the partner of the firm who is the designated auditor)
would be permitted (or at least not be prohibited) by the Companies Act from
providing tax advisory, bookkeeping, accounting and internal audit services to
their audit client.
24. The change suggested in paragraph 22,
would however create a significant practical difficulty for both individual
Registered Auditors who are not part of a firm and for a sole
proprietor Registered Auditor who
practices as a firm. The difficulty that would arise in both of these
cases is that to the extent that such an individual or sole proprietor firm was
the designated auditor of a Public Interest Company, he or she would not be able to provide any
of the services listed in section 275A(1) to his/her Public Interest Company audit client. As
we understand, however, that the intention of the section is to prevent the
specified non-audit services from being provided by the individual Registered
auditor who is responsible for the Audit of a Public Interest Company this
consequence appears to us to be unavoidable as the intention of section 275A is
to prevent the services specified in the section from being provided by the individual
person who is responsible for the Public Interest Company Audit.
Role of IRBA pre-empted
25. Parliament has recently passed the
Auditing Professions Act 26 of 2005 (“APA), which established the Independent
Regulatory Board for Auditors (“IRBA”) to replace the Public Accountants &
Auditors Board. Section 21 of APA requires the IRBA to establish an Auditor
Ethics Committee, which must set a Code of Conduct. This Code will deal, inter
alia, with auditor independence. The
role of IRBA in regulating audits and formulating measures to ensure good
ethics in the auditing profession will effectively be partially pre-empted by
the proposed section 275A, so far as the subsequent determination by IRBA of
specific non-audit services that the auditor of a Public Interest Company may not provide to such a company is
concerned. If section 275A becomes law,
this Auditor Ethics Committee may then have to motivate further legislative
changes to the Companies Act to implement any proposed auditor independence
rules that it may possibly determine are appropriate.
26. For the ethics standard setting process
to be transparent and IRBA to fulfil one of the main objectives for which it
was created, it should in our view be allowed to make this determination rather
than this being done by way of Companies Act amendments. We understand from
their submissions on the earlier drafts of the Bill that the PAAB and SAICA
also share this concern.
Conclusion & recommendations
Deletion
of section 275A
27. We recommend that the proposed new
section 275A should be deleted in its entirety from the Bill to allow the
Independent Regulatory Body for Auditors ("IRBA) to fulfil its statutory
obligations in terms of the Auditing Profession Act 2005 to regulate the
auditing profession. This would allow a
full and transparent debate to take place on auditor independence that involves
the participation of all stakeholders such as Government, SARS, the investing
public, Public Interest Companies, IRBA, individual Registered Auditors
and firms, SAICA and the JSE Limited. This debate should take into
account the international environment in which many Public Interest Companies
operate.
28 If our recommendation to delete the
proposed section 275A(1) from the Bill in its entirety is not accepted, then we
recommend that the words “An auditor” in section 275A(1) should be
replaced with the words “The “designated auditor” or the individual Registered
Auditor referred to in section 37 of the Auditing Profession Act, 2005 (Act No.
26 of 2005) who is ....” and that the words "tax advisory
services" are deleted from
section 275A(1). This would result in section 275A(1) having the
same scope as in the previous draft of the Bill.